Adjudication v the Insolvency Rules - the indisputable winner is…

By Andrew Weston

Every now and again our clients find themselves faced with a claim, or the threat of a claim, arising out of a construction contract where the party claiming money is in liquidation. In these circumstances it can be difficult to explain that a party in liquidation has no right to adjudicate a claim given that the right to adjudicate a dispute under a construction contract arises, according to the Construction Act, “at any time”. Hopefully any uncertainty surrounding this issue has now been finally resolved.

In Michael J Lonsdale (Electrical) Limited v Bresco Electrical Services Limited (In Liquidation) Mr Justice Fraser confirmed the precedence of rule 14.25 of the Insolvency Rules 2016 when it comes to claims under construction contracts that existed prior to the date of liquidation, and firmly dismissed any notion such claims might be referred to adjudication.

Bresco entered into a contract with Lonsdale for electrical installation works in August 2014. Bresco left the site in December 2014 before the works had been completed. Both Bresco and Lonsdale alleged wrongful termination against the other. Bresco then became insolvent and entered into liquidation on 12 March 2015.

In October 2017, Lonsdale intimated a claim against Bresco, claiming the direct costs of completing the works said to have been caused by this termination. Bresco’s liquidator responded that it was Lonsdale who had wrongfully terminated, and so owed Bresco money.

On 18 June 2018, Bresco commenced an adjudication against Lonsdale under the contract. Lonsdale invited the adjudicator to resign on the basis he had no jurisdiction given Bresco had been placed in liquidation. The adjudicator declined the invitation, having concluded he did have jurisdiction.

" The only dispute that remained in law was that of taking the account under the 2016 Rules. The only claim that Bresco could have, subject to that account of the mutual credits/debts with Lonsdale, was a claim to the net balance under rule 14.25(2). "

Lonsdale commenced Part 8 proceedings and the parties agreed to stay the adjudication pending the determination of Lonsdale’s claim. The question to be answered, as framed by the Judge, was “Whether a company in liquidation can refer a dispute to adjudication when that dispute includes (in whole or in part) determination of a claim for further sums said to be due to the referring party from the responding party?”

The Judge’s starting point was the Insolvency Rules 2016, rule 14.25:

“An account must be taken of what is due from the company and the creditor to each other in respect of their mutual dealings [which includes mutual credits/debts between the company and a creditor] and the sums due from the one must be set off against the sums due from the other.”

The Judge reviewed the relevant authorities and found that the respective claims and counterclaims of Lonsdale and Bresco were caught by rule 14.25 as they were “mutual dealings” between the company in liquidation (Bresco) and the creditor (Lonsdale). The mandatory Insolvency Rules required that an account must be taken of those dealings in each direction to arrive at a single net balance due either to, or from, the company in liquidation, as at the date of liquidation.

The Judge concluded:

“…as at the date of the liquidation, and as a direct result of what occurs upon the appointment of the liquidator and the operation of the Insolvency Rules, the disputes between Lonsdale and Bresco that consist of claims and cross-claims between them become replaced with a single debt. That is thereafter the dispute, namely the result of the account that the 2016 Rules require to be taken to determine the balance payable in which direction.”

The only dispute that remained in law was that of taking the account under the 2016 Rules. The only claim that Bresco could have, subject to that account of the mutual credits/debts with Lonsdale, was a claim to the net balance under rule 14.25(2). As the net balance due to one party or the other arises under the Insolvency Rules and not the contract, there could be no jurisdiction for an adjudicator to decide the issue.

Bresco sought to rely on practical and commercial aspects of the situation in the light of the fact that liquidators across the country regularly refer disputes to adjudication. Bresco also cited the judgment in Philpott v Lycee Francais Charles de Gaulle School, where the Judge was asked by the liquidators of a company in voluntary liquidation to consider in the context of cross claims if adjudication was available; the Judge confirmed that it was. Mr Justice Fraser was clear that factors such as the conduct of many insolvency practitioners cannot affect the correct legal characterisation of disputes as mutual dealings which are set down in the Insolvency Rules, which have statutory force.With respect to the judgment in Philpott, Mr Justice Fraser made clear that he considered those passages concerning adjudication where a company is in liquidation simply to be wrong and declined to follow the corresponding reasoning.

Mr Justice Fraser has firmly stated that under the Insolvency Rules, the right to adjudication by, or against, a party in liquidation ceases upon the date the company is placed in liquidationand that claims on behalf of liquidators cannot be pursued in adjudication. In the event an adjudicator is appointed, they should resign when called upon to do so.